Trump, Tariffs, And ‘The Boy Who Cried Wolf’

Suppose you’re the chief executive officer of an automobile company.

You’ve done precisely what NAFTA (and the slightly revised version of NAFTA, the United States-Mexico-Canada Agreement) suggested you should do. To minimize the costs in your supply chain, you have a factory in Canada that manufactures tires. You have a factory in Mexico that manufactures engines. And you do the final assembly of your vehicles in the United States.

Many of the components of your automobiles cross national lines — between the U.S., Mexico, and China — many times.

The Trump administration says that it wants you to manufacture vehicles entirely in the United States. This might make sense; it might not. The decision depends in part on the tariffs that are in effect.

Donald Trump announces on January 20 that the United States will impose 25% tariffs on Canada and Mexico starting February 1.

If that’s true, then it might make sense to build tire and engine factories in the United States. But those factories will cost a ton of money to build, and they won’t get built overnight. You start thinking about how best to structure your business.

On February 1, Trump signs an executive order imposing 25% tariffs on Canada and Mexico set to begin on February 4.

Okay. You can start thinking about how to structure your business.

On February 3, Trump agrees to a 30-day pause on the Canadian and Mexican tariffs.

On February 27, Trump announces that the tariffs will be enforced starting March 4.

On March 4, the tariffs take effect (with an exception for certain Canadian energy imports).

On March 5, Trump announces a one-month exemption on the tariffs for U.S. automakers. 

On March 6, Trump extends the delay on the 25% tariffs for many other goods until April 2.

On March 10, Ontario imposes a surcharge on some electricity entering the United States; on the morning of March 11, Trump says he’ll retaliate by adding another 25% to the steel and aluminum tariffs; on the afternoon of March 11, Ontario suspends its surcharge; Trump in turn undoes his proposed retaliation. We’ve made it all the way to the night of March 11.

How does someone invest in an environment like this?

As a CEO, what do you tell your board of directors about investing hundreds of millions of dollars in new plants in the United States that will not be completed for several years?

Commit money to building the plants, and look like a jerk when Trump changes the tariff situation?

Commit money to building the plants, and realize several years from now that the combination of low unemployment and mass deportation makes it impossible to hire the necessary employees?

Choose not to commit the money, and look like a jerk when Trump changes the tariff situation in some other way?

Or just sit on your thumbs, because the president is entirely unpredictable, and your board surely won’t fire you for avoiding risk and standing pat?

The same thinking holds true for every other business in America. If Trump’s idea is to rebuild American manufacturing — to onshore jobs from Canada or Mexico or China or anywhere else in the world — then tariffs must be imposed for years to give businesses economic space to build new plants. A mere four years — a presidential term — is short for those purposes, but four weeks, or four days, or four minutes, before Trump changes his mind about tariffs is plainly not enough.

If Trump wants to use tariffs for short-term deal making — coerce Colombia into accepting folks deported from the United States, and then remove the tariff — that’s fine, but that use of tariffs will never result in jobs being onshored. An administration must decide on its goals and then pursue those goals as though they matter.

Trump has a short time to establish his credibility with businesses, but he’ll quickly become the boy who cries wolf. If he keeps imposing — and then removing — tariffs, businesses will soon decide simply to wait for a new administration, when the president is rational and the business environment more certain.

There’s a price to be paid for being erratic, and the price is precisely the thing that Trump should most desire — more business investment in the United States.

Mark Herrmann spent 17 years as a partner at a leading international law firm and later oversaw litigation, compliance and employment matters at a large international company. He is the author of The Curmudgeon’s Guide to Practicing Law and Drug and Device Product Liability Litigation Strategy (affiliate links). You can reach him by email at inhouse@abovethelaw.com.

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